filings.toolsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
48K characters. Original on sec.gov · Markdown
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion analyzes the financial condition and results of operations of both MAA and the Operating Partnership, of which MAA is the sole general partner and in which MAA owned a 96.6% interest as of December 31, 2019. MAA conducts all of its business through the Operating Partnership and its various subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
MAA, an S&P 500 company, is a multifamily-focused, self-administered and self-managed real estate investment trust, or REIT. We own, operate, acquire and selectively develop apartment communities primarily located in the Southeast, Southwest and Mid-Atlantic regions of the United States. As of December 31, 2019, we owned and operated 299 apartment communities through the Operating Partnership and its subsidiaries, and we had an ownership interest in one apartment community through an unconsolidated real estate joint venture and had seven development communities under construction. In addition, as of December 31, 2019, we owned four commercial properties, and 32 of our apartment communities included retail components. Our apartment communities and commercial properties are located across 16 states and the District of Columbia.
We report in two segments, Same Store and Non-Same Store and Other. Our Same Store segment represents those apartment communities that have been owned and stabilized for at least 12 months as of the first day of the calendar year. Our Non-Same Store and Other segment includes recently acquired communities, communities being developed or in lease-up, communities undergoing extensive renovations, communities identified for disposition and communities that have incurred a significant casualty loss. Also included in our Non-Same Store and Other segment are non-multifamily activities. Additional information regarding the composition of our segments is included in Note 13 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Overview
For the year ended December 31, 2019, net income available for MAA common shareholders was $350.1 million as compared to $219.2 million for the year ended December 31, 2018. Results for the year ended December 31, 2019 included $17.9 million of income related to the fair value adjustment of the embedded derivative in the MAA Series I preferred shares and $93.0 million of gains related to the sale of real estate assets. Results for the year ended December 31, 2018 included $2.6 million of
expense related to the adjustment of the embedded derivative and $4.5 million of gains related to the sale of real estate assets. Revenues for the year ended December 31, 2019 increased 4.4% as compared to the year ended December 31, 2018, driven by a 3.4% increase in our Same Store segment and an 18.5% increase in our Non-Same Store and Other segment. Property operating expenses, excluding depreciation and amortization, for the year ended December 31, 2019 increased by 3.1% as compared to the year ended December 31, 2018, driven by a 2.9% increase in our Same Store segment and a 5.5% increase in our Non-Same Store and Other segment. The drivers of these increases are discussed below in the “Results of Operations” section.
Over the past three years, our growth has partially been driven by our acquisition and development strategy to invest in growing markets in the Southeast, Southwest and Mid-Atlantic regions of the United States. We acquired one apartment community in 2019, one in 2018, and two in 2017. Five apartment communities were disposed in 2019 and five apartment communities were disposed in 2017. No apartment communities were disposed in 2018. Two multifamily development projects were completed in 2019, three in 2018 and seven in 2017.
Trends
During the year ended December 31, 2019, we were favorably impacted by rent pricing growth throughout the year. Average effective rent per unit for the Same Store portfolio continued to increase, up 3.6% for the year ended December 31, 2019 as compared to the year ended December 31, 2018. Average daily physical occupancy for our Same Store portfolio was 95.9% for the year ended December 31, 2019 as compared with the average daily physical occupancy of 96.1% achieved during the year ended December 31, 2018.
An important part of our portfolio strategy is to maintain diversity of markets, submarkets, product types and price points in the Southeast, Southwest and Mid-Atlantic regions of the United States. This diversity tends to mitigate exposure to economic issues in any one geographic market or area. We believe that a well-balanced portfolio, including inner loop, suburban and downtown/central business district locations, with various monthly rent price points, will perform well in “up” cycles as well as weather “down” cycles better. Through our investment in 36 defined markets, we are diversified across markets, urban and suburban submarkets and a variety of product types and monthly rent pricing points.
Though overall demand continues to be strong, the current elevated supply levels are impacting rent growth for our portfolio, particularly for apartment communities located in urban submarkets. Properties in suburban submarkets have been impacted somewhat less by supply, primarily because less new development has occurred in those submarkets. Multifamily permitting is typically a leading indicator of future supply levels. Multifamily permitting across our markets was up in 2018 as compared to 2017, and the U.S. Census Bureau's data for 2019 suggested multifamily permitting across our markets was up as compared to 2018. It is difficult to project supply levels based on this data because not all permitted projects are ultimately built. However, given the current supply level and the 2019 permitting data, we believe that supply in some of our markets could remain elevated over the next couple of years.
Demand for our apartments is primarily driven by general economic conditions in our markets. In particular, job growth relative to new supply is a critical factor in our ability to maintain occupancy and increase rents. To the extent that economic conditions continue to support increased job growth, we believe that we may be able to maintain solid occupancy and more effectively increase rents. We also believe that the existing disciplined credit terms for residential mortgages should continue to favor rental demand at multifamily apartment communities. Furthermore, rental competition from single family homes has not historically been a major competitive factor impacting our portfolio. We have seen significant rental competition from single family homes in only a few of our submarkets. For the year ended December 31, 2019, total move outs attributable to single family home rentals for our combined portfolio represented less than 6% of total move outs, down from approximately 7% for the year ended December 31, 2018. Long term, we expect demographic trends (including the growth of prime age groups for rentals and immigration and population movement to the Southeast, Southwest and Mid-Atlantic regions) will continue to support apartment rental demand in our markets.
Changing interest rates may have a significant impact on our business and results of operations. As of December 31, 2019, we had approximately $4.5 billion of debt, of which 2% had variable rate interest and 98% had fixed or hedged interest rates. To the extent interest rates rise, our net interest expense on variable rate debt will increase as will potentially our net interest expense on any debt refinancing. The opposite is true should interest rates decrease. Given the short-term nature of our leases, to the extent interest rates rise due to general economic growth, we would expect increases in interest expense to be somewhat offset by positive leasing trends.
Our focus is on maintaining strong physical occupancy while increasing pricing where possible through our revenue management system. As noted above, average daily physical occupancy for our Same Store portfolio for the year ended December 31, 2019 was 95.9%. As we continue through the typically slower winter leasing season, we believe that the current level of physical occupancy and continued strong job growth in our markets position us well for this period and sets us up to achieve continued pricing growth in 2020.
Results of Operations
For the year ended December 31, 2019, we achieved net income available for MAA common shareholders of $350.1 million, a 59.7% increase as compared to the year ended December 31, 2018, and total revenue growth of $69.7 million, representing a 4.4% increase in property revenues as compared to the year ended December 31, 2018. The following discussion describes the primary drivers of the increase in net income available for MAA common shareholders for the year ended December 31, 2019, as compared to the year ended December 31, 2018. A discussion of the results of operations for the year ended December 31, 2017 is found in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019, which is available free of charge on the SEC’s website at www.sec.gov and on our website at https://www.maac.com, on the “For Investors” page under “Filings and Financials—Annual Reports”.
Property Revenues
The following table reflects our property revenues by segment for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
| December 31, 2019 | December 31, 2018 | Increase | % Increase | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Same Store | $ | 1,517,875 | $ | 1,467,460 | $ | 50,415 | 3.4 | % | ||||||||
| Non-Same Store and Other | 123,142 | 103,886 | 19,256 | 18.5 | % | |||||||||||
| Total | $ | 1,641,017 | $ | 1,571,346 | $ | 69,671 | 4.4 | % |
The increase in property revenues for our Same Store segment for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was the primary driver of total property revenue growth. The Same Store segment generated a 3.4% increase in revenues for the year ended December 31, 2019, primarily a result of average effective rent per unit growth of 3.6% as compared to the year ended December 31, 2018. The increase in property revenues from the Non-Same Store and Other segment for the year ended December 31, 2019 as compared to year ended December 31, 2018 was primarily the result of continued lease-up of our development communities.
Property Operating Expenses
Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other operating expenses. The following table reflects our property operating expenses by segment for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
| December 31, 2019 | December 31, 2018 | Increase | % Increase | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Same Store | $ | 561,800 | $ | 546,220 | $ | 15,580 | 2.9 | % | ||||||||
| Non-Same Store and Other | 51,045 | 48,368 | 2,677 | 5.5 | % | |||||||||||
| Total | $ | 612,845 | $ | 594,588 | $ | 18,257 | 3.1 | % |
The increase in property operating expenses for our Same Store segment for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily driven by an increase in real estate tax expense of $10.0 million. The increase in property operating expenses from our Non-Same Store and Other segment was driven by an increase in real estate tax expense, primarily due to the recent completion of apartment communities previously in our development pipeline.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2019 was $496.8 million, an increase of $7.1 million as compared to the year ended December 31, 2018. The increase was primarily driven by the recognition of depreciation expense associated with our development and redevelopment activities made in the normal course of business during the year ended December 31, 2019.
Other Income and Expenses
Property management expenses for the year ended December 31, 2019 were $55.0 million, an increase of $7.4 million as compared to the year ended December 31, 2018. The increase was primarily due to increases in personnel and technology costs. General and administrative expenses for the year ended December 31, 2019 were $46.1 million, an increase of $11.3 million as compared to the year ended December 31, 2018, primarily due to increases in personnel and legal costs. No merger and integration expenses were incurred during the year ended December 31, 2019, which represented a decrease of $9.1 million as compared to the year ended December 31, 2018.
Interest expense for the year ended December 31, 2019 was $179.8 million, an increase of $6.3 million as compared to the year ended December 31, 2018. The increase was primarily due to an increase of approximately 14 basis points in our effective
interest rate during the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase in the effective interest rate was primarily due to the recent maturity of debt we assumed in previous corporate acquisitions.
For the year ended December 31, 2019, we disposed of five apartment communities, resulting in gains on sale of depreciable real estate assets of $81.0 million. We did not dispose of any apartment communities during the year ended December 31, 2018. The gain on sale of non-depreciable assets for the year ended December 31, 2019 was $12.0 million, an increase of $7.5 million as compared to the year ended December 31, 2018. Although annual land disposition volume remained consistent year-over-year, the gain on sale of non-depreciable assets increased primarily due to the nature of the real estate assets sold.
Other non-operating income for the year ended December 31, 2019 was $25.3 million, an increase of $19.8 million as compared to the year ended December 31, 2018. The increase was primarily due to the recognition of $17.9 million of income related to the fair value adjustment of the embedded derivative in the MAA Series I preferred shares during the year ended December 31, 2019 as compared to the recognition of $2.6 million of expense related to the adjustment of the embedded derivative during the year ended December 31, 2018.
Funds from Operations
Funds from operations, or FFO, a non-GAAP financial measure, represents net income available for MAA common shareholders (computed in accordance with the United States generally accepted accounting principles, or GAAP) excluding gains or losses on disposition of operating properties and asset impairment, plus depreciation and amortization of real estate assets, net income attributable to noncontrolling interests and adjustments for joint ventures. Because noncontrolling interest is added back, FFO, when used in this Annual Report on Form 10-K, represents FFO attributable to the Company.
FFO should not be considered as an alternative to net income available for MAA common stockholders or any other GAAP measurement, as an indicator of operating performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. Management believes that FFO is helpful to investors in understanding our operating performance, primarily because its calculation excludes depreciation and amortization expense on real estate assets. We believe that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies. While our calculation of FFO is in accordance with the National Association of Real Estate Investment Trusts’, or NAREIT's, definition, it may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs.
The following table presents a reconciliation of net income available for MAA common shareholders to FFO for the years ended December 31, 2019 and 2018, as we believe net income available for MAA common shareholders is the most directly comparable GAAP measure (dollars in thousands):
| Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | ||||||||
| Net income available for MAA common shareholders | $ | 350,123 | $ | 219,211 | |||||
| Depreciation and amortization of real estate assets | 490,632 | 484,722 | |||||||
| (Gain) loss on sale of depreciable real estate assets | (80,988 | ) | 39 | ||||||
| Depreciation and amortization of real estate assets of real estate joint venture | 618 | 595 | |||||||
| Net income attributable to noncontrolling interests | 12,807 | 8,123 | |||||||
| Funds from operations attributable to the Company | $ | 773,192 | $ | 712,690 |
FFO for the year ended December 31, 2019 was $773.2 million, an increase of $60.5 million as compared to the year ended December 31, 2018, primarily as a result of increases in property revenues of $69.7 million, other non-operating income of $19.8 million and gain on sale of non-depreciable assets of $7.5 million, in addition to a decrease in merger and integration expenses of $9.1 million. The increases to FFO were offset by increases in property operating expenses, excluding depreciation and amortization, of $18.3 million, general and administrative expenses of $11.3 million, property management expenses of $7.4 million and interest expense of $6.3 million.
Liquidity and Capital Resources
Our cash flows from operating, investing and financing activities, as well as general economic and market conditions, are the principal factors affecting our liquidity and capital resources.
Operating Activities
Net cash provided by operating activities was $781.4 million for the year ended December 31, 2019 as compared to $734.3 million for the year ended December 31, 2018. The increase in operating cash flows was primarily driven by our operating performance, partially offset by the timing of cash payments.
Investing Activities
Net cash used in investing activities was $238.3 million for the year ended December 31, 2019 as compared to $366.4 million for the year ended December 31, 2018. The primary drivers of the change were as follows (dollars in thousands):
| Primary drivers of cash (outflow) inflow during the year ended December 31, | Increase (Decrease) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | in Net Cash | ||||||||||
| Purchases of real estate and other assets | $ | (105,106 | ) | $ | (129,487 | ) | $ | 24,381 | ||||
| Capital improvements, development and other | (303,097 | ) | (254,715 | ) | (48,382 | ) | ||||||
| Proceeds from disposition of real estate assets | 174,814 | 19,982 | 154,832 |
The decrease in cash outflows for purchases of real estate and other assets was driven by the acquisition activity during the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase in cash outflows for capital improvements, development and other as compared to the prior year was primarily driven by increased development capital spend during the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase in cash inflows related to proceeds from disposition of real estate assets was primarily due to the sale of five apartment communities and four land parcels during the year ended December 31, 2019, as compared to the sale of four land parcels during the year ended December 31, 2018. No apartment communities were sold during the year ended December 31, 2018.
Financing Activities
Net cash used in financing activities was $524.3 million for the year ended December 31, 2019 as compared to $405.1 million for the year ended December 31, 2018. The primary drivers of the change were as follows (dollars in thousands):
| Primary drivers of cash (outflow) inflow during the year ended December 31, | (Decrease) Increase | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | in Net Cash | ||||||||||
| Net change in credit lines | $ | (540,000 | ) | $ | 50,000 | $ | (590,000 | ) | ||||
| Net change in commercial paper | 70,000 | — | 70,000 | |||||||||
| Proceeds from notes payable | 1,059,289 | 869,630 | 189,659 | |||||||||
| Principal payments on notes payable | (657,619 | ) | (878,610 | ) | 220,991 | |||||||
| Dividends paid on common shares | (437,743 | ) | (419,849 | ) | (17,894 | ) |
The increase in cash outflows related to the net change in credit lines resulted from the decrease in net borrowings of $540.0 million on our unsecured revolving credit facility during the year ended December 31, 2019 as compared to the increase in net borrowings of $50.0 million on the unsecured revolving credit facility during the year ended December 31, 2018. The increase in cash inflows related to the net change in commercial paper resulted from the initiation of an unsecured commercial paper program during the year ended December 31, 2019; there was no commercial paper program in place during the year ended December 31, 2018. The increase in cash inflows related to proceeds from notes payable primarily resulted from the issuance of $850.0 million of senior unsecured notes and $191.3 million of secured property mortgages during the year ended December 31, 2019, as compared to the issuance of $400.0 million of senior unsecured notes, $172.0 million of secured property mortgages and a $300.0 million unsecured term loan during the year ended December 31, 2018. The decrease in cash outflows from principal payments on notes payable primarily resulted from the retirement of $600.0 million in unsecured term loans, the retirement of a $20.0 million tranche of senior unsecured notes and the retirement of $30.4 million of secured property mortgages during the year ended December 31, 2019 as compared to the retirement of $568.0 million of secured property mortgages, the retirement of a $250.0 million unsecured term loan and the retirement of a $50.0 million tranche of senior unsecured notes during the year ended December 31, 2018. The increase in cash outflows from dividends paid on common shares primarily resulted from the increase in the annual dividend rate to $3.84 per share during the year ended December 31, 2019 as compared to the annual dividend rate of $3.69 per share during the year ended December 31, 2018.
Equity
As of December 31, 2019, MAA owned 114,246,393 OP Units, comprising a 96.6% limited partnership interest in MAALP, while the remaining 4,067,174 outstanding OP Units were held by limited partners of MAALP other than MAA. Holders of OP Units (other than MAA) may require us to redeem their OP Units from time to time, in which case MAA may, at its option, pay the redemption price either in cash (in an amount per OP Unit equal, in general, to the average closing price of MAA's common stock on the NYSE over a specified period prior to the redemption date) or by delivering one share of MAA's common stock (subject to adjustment under specified circumstances) for each OP Unit so redeemed. In addition, MAA has registered under the Securities Act 4,067,174 shares of its common stock that, as of December 31, 2019, were issuable upon redemption of OP Units, in order for those shares to be sold freely in the public markets.
We have entered into separate distribution agreements with each of J.P. Morgan Securities LLC, BMO Capital Markets Corp. and KeyBanc Capital Markets Inc. to establish an ATM program allowing MAA to sell shares of its common stock from time to time into the existing market at current market prices or through negotiated transactions. Under the ATM program, MAA has the authority to issue up to an aggregate of 4.0 million shares of its common stock, at such times to be determined by MAA. The ATM program currently has a maturity of September 28, 2021. MAA has no obligation to issue shares through the ATM program.
During the year ended December 31, 2019, MAA sold 146,301 shares of common stock for net and gross proceeds of $19.6 million and $19.9 million, respectively, through its ATM program, all of which shares were sold during the three months ended December 31, 2019. During the year ended December 31, 2018, MAA did not sell any shares of common stock under its ATM program. As of December 31, 2019, there were 3.9 million shares remaining under the ATM program.
For more information regarding our equity capital resources, see Note 8 and Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Debt
The following schedule reflects our fixed and variable rate debt, including the impact of our interest rate swaps, outstanding as of December 31, 2019 (dollars in thousands):
| Principal Balance | Average Years to Rate Maturity | Effective Rate | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unsecured debt | ||||||||||||
| Fixed rate or swapped | $ | 3,772,000 | 6.1 | 3.7 | % | |||||||
| Variable rate | 70,000 | 0.1 | 2.1 | % | ||||||||
| Debt issuance costs, discounts, premiums and fair market value adjustments | (13,799 | ) | ||||||||||
| Total unsecured rate maturity | $ | 3,828,201 | 6.1 | 3.7 | % | |||||||
| Secured debt | ||||||||||||
| Conventional - fixed rate | $ | 629,817 | 17.3 | 4.5 | % | |||||||
| Debt issuance costs and fair market value adjustments | (3,420 | ) | ||||||||||
| Total secured rate maturity | $ | 626,397 | 17.3 | 4.5 | % | |||||||
| Total debt | $ | 4,454,598 | 7.5 | 3.8 | % | |||||||
| Total fixed or hedged debt | $ | 4,384,598 | 7.6 | 3.9 | % |
As of December 31, 2019, we had entered into interest rate swaps totaling a notional amount of $300.0 million related to issued debt. To date, we believe the interest rate swaps have proven to be highly effective hedges.
The following schedule presents the contractual maturity dates of our outstanding debt, net of debt issuance costs, discounts and fair market value adjustments, as of December 31, 2019 (dollars in thousands):
| Revolving Credit Facility & Comm. Paper ⁽¹⁾ ⁽²⁾ | Public Bonds | Other Unsecured | Secured | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | $ | 70,000 | $ | — | $ | — | $ | 137,805 | $ | 207,805 | ||||||||||
| 2021 | — | — | 72,673 | 120,862 | 193,535 | |||||||||||||||
| 2022 | — | 248,899 | 416,352 | — | 665,251 | |||||||||||||||
| 2023 | — | 347,490 | 12,225 | — | 359,715 | |||||||||||||||
| 2024 | — | 396,438 | 19,950 | — | 416,388 | |||||||||||||||
| Thereafter | — | 2,244,174 | — | 367,730 | 2,611,904 | |||||||||||||||
| Total | $ | 70,000 | $ | 3,237,001 | $ | 521,200 | $ | 626,397 | $ | 4,454,598 |
| (1) | The $70.0 million maturing in 2020 reflects the principal outstanding on MAALP’s unsecured commercial paper program as of December 31, 2019. |
|---|
| (2) | There are no borrowings outstanding on MAALP’s $1.0 billion unsecured revolving credit facility as of December 31, 2019. The unsecured revolving credit facility has a maturity date of May 2023 plus two six-month extensions. |
|---|
The following schedule reflects the interest rate maturities of our outstanding fixed or hedged debt, net of fair market value adjustments, debt issuance costs and discounts, as of December 31, 2019 (dollars in thousands):
| Fixed Rate Debt | Hedged Debt | Total Fixed Rate Balances | Effective Rate | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | $ | 137,805 | $ | 299,557 | $ | 437,362 | 2.9 | % | ||||||||
| 2021 | 193,535 | — | 193,535 | 5.2 | % | |||||||||||
| 2022 | 365,694 | — | 365,694 | 3.6 | % | |||||||||||
| 2023 | 359,715 | — | 359,715 | 4.2 | % | |||||||||||
| 2024 | 416,388 | — | 416,388 | 4.0 | % | |||||||||||
| Thereafter | 2,611,904 | — | 2,611,904 | 3.9 | % | |||||||||||
| Total | $ | 4,085,041 | $ | 299,557 | $ | 4,384,598 | 3.9 | % |
Unsecured Revolving Credit Facility & Commercial Paper
In May 2019, the Operating Partnership entered into a $1.0 billion unsecured revolving credit facility with a syndicate of banks led by Wells Fargo Bank, National Association, or Wells Fargo, and fifteen other banks, which we refer to as the Credit Facility. The Credit Facility replaced our previous unsecured revolving credit facility and includes an expansion option up to $1.5 billion. The Credit Facility bears an interest rate of LIBOR, plus a spread of 0.75% to 1.45% based on an investment grade pricing grid. The Credit Facility matures in May 2023 with an option to extend for two additional six-month periods. As of December 31, 2019, there was no outstanding balance under the Credit Facility, while $2.7 million of capacity was being used to support outstanding letters of credit.
In May 2019, the Operating Partnership established an unsecured commercial paper program, whereby the Operating Partnership may issue unsecured commercial paper notes with varying maturities not to exceed 397 days up to a maximum aggregate amount outstanding of $500.0 million. As of December 31, 2019, the Operating Partnership had $70.0 million outstanding under the commercial paper program. During the year ended December 31, 2019, our average daily borrowings outstanding under the commercial paper program were $211.7 million. The commercial paper program along with the Credit Facility serve as our primary sources of short-term liquidity.
Senior Unsecured Notes
As of December 31, 2019, we had $3.3 billion, in principal amount of publicly issued senior unsecured notes outstanding. In March 2019, the Operating Partnership publicly issued $300.0 million of senior unsecured notes due March 2029 with a coupon of 3.950%, paid semi-annually on March 15 and September 15, and an effective interest rate of 4.240%, net of swap agreements. In August 2019, the Operating Partnership publicly issued an additional $250.0 million of senior unsecured notes due March 2029 with a coupon of 3.950%, paid semi-annually on March 15 and September 15, and an effective interest rate of 2.985%. In November 2019, the Operating Partnership publicly issued $300.0 million of senior unsecured notes due March 2030 with a coupon of 2.750%, paid semi-annually on March 15 and September 15, and an effective interest rate of 3.065%, net of swap agreements. The proceeds from the senior unsecured notes issued in March 2019 were used to pay down outstanding amounts under our previous unsecured revolving credit facility, and the proceeds from the senior unsecured notes issued in August 2019 and November 2019 were used to pay down amounts outstanding under our commercial paper program.
As of December 31, 2019, we also had $222.0 million outstanding of senior unsecured notes issued in two private placement offerings. A $20.0 million tranche with an interest rate of 3.61% was retired in November 2019 on its maturity date.
Unsecured Term Loans
As of December 31, 2019, we maintained one term loan with a syndicate of banks, led by Wells Fargo. The term loan has a balance of $300.0 million, matures in 2022, and has a variable interest rate of LIBOR plus a spread of 0.90% to 1.75% based on the Company's credit ratings. The interest rate of the term loan is fixed at 2.32% with interest rate swaps that mature in January 2020.
In May 2019, we retired a $300.0 million term loan with Wells Fargo, which was due in June 2019.
In August 2019, we retired a $150.0 million term loan with U.S. Bank National Association, which was due in March 2020.
In November 2019, we retired a $150.0 million term loan with KeyBank National Association, which was due in February 2021.
Secured Property Mortgages
We maintain secured property mortgages with the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and various life insurance companies. These mortgages are usually fixed rate and can range from five to 30 years in maturity. As of December 31, 2019, we had $629.8 million of secured property mortgages. In February 2019, we entered into a
$191.3 million mortgage with a fixed rate of 4.43% associated with seven apartment communities that is scheduled to mature in February 2049. During the year ended December 31, 2019, we retired $30.4 million of secured property mortgages.
For more information regarding our debt capital resources, see Note 5 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Contractual Obligations
The following table reflects our total contractual cash obligations as of December 31, 2019, which consist of principal and interest on our long-term debt as well as operating leases (dollars in thousands):
| Contractual Obligations | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt obligations (1) | $ | 211,108 | $ | 192,903 | $ | 668,401 | $ | 363,731 | $ | 421,566 | $ | 2,614,108 | $ | 4,471,817 | ||||||||||||||
| Fixed rate or swapped interest (2) | 160,460 | 150,522 | 144,541 | 130,716 | 108,240 | 646,076 | 1,340,555 | |||||||||||||||||||||
| Variable rate interest (3) | 7,295 | 7,923 | 1,321 | — | — | — | 16,539 | |||||||||||||||||||||
| Operating lease obligations (4) | 2,825 | 2,854 | 2,885 | 2,875 | 2,853 | 65,863 | 80,155 | |||||||||||||||||||||
| Total | $ | 381,688 | $ | 354,202 | $ | 817,148 | $ | 497,322 | $ | 532,659 | $ | 3,326,047 | $ | 5,909,066 |
| (1) | Represents principal payments gross of discounts, premiums, debt issuance costs and fair market value adjustments of debt assumed. |
|---|
| (2) | Swapped interest is subject to the ineffective portion of cash flow hedges as described in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. |
|---|
| (3) | Interest payments on variable rate debt instruments not subject to interest rate swaps are based on each debt instrument's respective interest rate as of December 31, 2019, which is assumed to be in effect through the maturity date of the respective debt instrument. |
|---|
| (4) | Primarily comprised of a ground lease underlying one apartment community we own and the lease of our corporate headquarters. |
|---|
We have a commitment, which is not reflected in the table above, to make additional capital contributions to a limited partnership in which we hold an equity interest. The capital contributions may be called by the general partner at any time until September 2022 after giving appropriate notice. As of December 31, 2019, we had committed to make additional capital contributions totaling up to $8.2 million if and when called by the general partner of the limited partnership and until September 2022.
Off-Balance Sheet Arrangements
As of December 31, 2019 and 2018, we had an ownership interest in a limited liability company, which owns one apartment community comprised of 269 units, located in Washington, D.C. We also had an ownership interest in a limited partnership as of December 31, 2019. Our interests in these investments are unconsolidated and are recorded using the equity method as we do not have a controlling interest.
As of December 31, 2019 and 2018, we did not have any relationships, including those with unconsolidated entities or financial partnerships, for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with us or our related parties other than those disclosed in Note 12 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Insurance
We carry comprehensive general liability coverage on our apartment communities, with limits of liability we believe are customary within the multifamily apartment industry, to insure against liability claims and related defense costs. We also maintain insurance against the risk of direct physical damage to reimburse us on a replacement cost basis for costs incurred to repair or rebuild any property, including loss of rental income during the reconstruction period.
We renegotiated our insurance programs effective July 1, 2019. We believe that the current property and casualty insurance program in place provides appropriate insurance coverage for financial protection against insurable risks such that any insurable loss experienced that can be reasonably anticipated would not have a significant impact on our liquidity, financial position or results of operations.
Inflation
Our resident leases at our apartment communities allow, at the time of renewal, for adjustments in the rent payable thereunder, and thus may enable us to seek rent increases. The majority of our leases are for one year or less. The short-term nature of these leases generally serves to reduce our risk to adverse effects of inflation.
Critical Accounting Policies and Estimates
A critical accounting policy is one that is both important to our financial condition and results of operations and that involves some degree of uncertainty. The preceding discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may differ from these estimates and assumptions.
We believe that the estimates and assumptions listed below are most important to the portrayal of our financial condition and results of operations because they require the greatest subjective determinations and form the basis of accounting policies deemed to be most critical.
Acquisition of real estate assets
We account for our acquisitions of investments in real estate as asset acquisitions in accordance with Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which requires the cost of the real estate acquired to be allocated to the individual acquired tangible assets, consisting of land, buildings and improvements and other, and identified intangible assets, consisting of the value of in-place leases and other contracts, on a relative fair value basis. In calculating the total asset value of acquired tangible assets, management uses stabilized net operating income, or NOI, and market specific capitalization and discount rates. Management analyzes historical stabilized NOI to determine its estimate for forecasted NOI. Management estimates the market capitalization rate by analyzing the market capitalization rates for properties with comparable ages in similarly sized markets. Management then allocates the purchase price of the asset acquisition based on the relative fair value of the individual components as a proportion of the total assets acquired.
Impairment of long-lived assets
We account for long-lived assets in accordance with the provisions of accounting standards for the impairment or disposal of long-lived assets. Management periodically evaluates long-lived assets, including investments in real estate, for indicators that would suggest that the carrying amount of the assets may not be recoverable. The judgments regarding the existence of such indicators are based on factors such as operating performance, market conditions and legal factors. Long-lived assets, such as real estate assets, equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset, which is estimated by analyzing historical cash flows of the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Management calculates the fair value of an asset by dividing projected cash flows based on historical operating cash flows by a market capitalization rate. Management estimates the market capitalization rate by analyzing the market capitalization rates for properties with comparable ages in similarly sized markets. No material impairment losses were recognized during the years ended December 31, 2019 and 2018.
Cost capitalization
In conformity with GAAP, we capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred. Therefore, repairs and maintenance costs are expensed as incurred while significant improvements, renovations and replacements are capitalized. The cost to complete any deferred repairs and maintenance at properties acquired by us in order to elevate the condition of the property to our standards are capitalized as incurred. The carrying costs related to development projects, including interest, property taxes, insurance and allocated direct development salary costs during the construction period, are capitalized. Management uses judgment in determining whether costs should be expensed or capitalized.
Loss contingencies
The outcomes of claims, disputes and legal proceedings are subject to significant uncertainty. Management records an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We also accrue an estimate of defense costs expected to be incurred in connection with legal matters. Management reviews these accruals quarterly and makes revisions based on changes in facts and circumstances. When a loss contingency is not both probable and reasonably estimable, then we do not accrue the loss. However, for material loss contingencies, if the unrecorded loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then management discloses a reasonable estimate of the possible loss, or range of loss, if such reasonable estimate can be made. If we cannot make a reasonable estimate of the possible loss, or range of loss, then a statement to that effect is disclosed.
The assessment of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involves a series of complex judgments about future events. Among the factors that we consider in this assessment, including with respect to the matters disclosed in this Annual Report on Form 10-K, are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar matters, the facts available to us at the time of assessment, and how we intend to respond, or have responded, to the proceeding or claim. Management's assessment of these factors may change over time as individual proceedings or claims progress. For matters where we are not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate; (ii) the proceedings are in the early stages; (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties; and/or (iv) discussions with the parties in matters that are expected ultimately to be resolved through negotiation and settlement have not reached the point where we believe a reasonable estimate of loss, or range of loss, can be made. In such instances, management believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss or business impact, if any.
Valuation of embedded derivative
The redemption feature embedded in the MAA Series I preferred stock is reported as a derivative asset and is adjusted to its fair value at each reporting date, with a corresponding non-cash adjustment to the income statement. The derivative asset related to the redemption feature is valued using widely accepted valuation techniques, including a discounted cash flow analysis in which the perpetual value of the preferred shares is compared to the value of the preferred shares assuming the call option is exercised, with the value of the bifurcated call option as the difference between the two values. The analysis reflects the contractual terms of the redeemable preferred shares, which are redeemable at our option beginning on October 1, 2026 and at the redemption price of $50 per share. We use various inputs in the analysis, including trading data available on the preferred shares, coupon yields on preferred stock issuances from REITs with similar credit ratings as MAA and treasury rates to determine the fair value of the bifurcated call option.
For more information regarding our significant accounting policies, including a brief description of recent accounting pronouncements that could have a material impact on our financial statements, see Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.